India cuts growth forecast

MUMBAI - INDIA'S central bank cut its growth forecast on Tuesday to 7 per cent - down from a prior estimate of 7.5 to 8.0 per cent - and warned of a deep, protracted global downturn, but left key interest rates unchanged.

Industrial production and consumer demand have slowed, business confidence is deteriorating, and the fiscal deficit is sharply up, the bank said.

Growth in the service sector, a key segment of India's economy, is also slowing. After 14 quarters of double-digit growth, India's service sector posted just 9.6 per cent growth during the July-September quarter, the bank said.

Reserve Bank of India Governor D. Subbarao said growth would likely become even more 'challenging' next fiscal year.

'The global crisis will dent India's growth trajectory as investments and exports slow. Clearly, there is a period of painful adjustment ahead of us,' he said in the bank's quarterly policy review statement.

'However, once the global economy begins to recover, India's turnaround will be sharper and swifter, backed by our strong fundamentals and the untapped growth potential,' he said.

Mr Subbarao also noted that the global slowdown clearly shows that emerging economies remain closely linked to developed markets.

'Contrary to the expectation of decoupling, which was a commonly held view even till recently, the crisis has spread to the emerging economies too,' he said.

India has already taken aggressive measures to boost growth, since September announcing two fiscal stimulus packages and pumping 3.9 trillion rupees (S$1.19 trillion) into the financial system.

Last quarter, the bank cut the repo rate - at which the central bank makes short-term loans to commercial banks - from 9 to 5.5 per cent, and the reverse repo - the rate at which it borrows from commercial banks - rate from 6 to 4 per cent, both historic lows. But economic growth has continued to slow.

Over the last five years, India's economic growth averaged 8.8 per cent a year. Gross domestic product growth from April to September was 7.8 per cent, down from 9.3 per cent for the same period the prior year.

The bank urged commercial banks to pass on easing credit to consumers more swiftly, noting that a few banks have yet to lower lending rates.

Despite the central bank's aggressive rate cuts - and a 4 percentage point cut in the cash reserve ratio, or the amount of cash commercial banks must keep on hand - commercial banks, fearful of rising bad loans, have reduced their rates to consumers by just 1.5 to 2 percentage points, according to Citigroup.

'There is room for banks to further reduce their lending rates,' Mr Subbarao told reporters.

India's fiscal deficit surged 83.3 per cent from April to November, after falling 11.0 per cent the same period the prior year.

Reduced tax collection and stimulus spending is expected to put even more strain on the budget, potentially pushing the fiscal deficit from 2.5 to at least 5.9 per cent of GDP, the bank said.

Counting the cost of oil subsidies, the deficit could hit 8 per cent of GDP, the bank said.

India's most-watched inflation indicator, the wholesale price index, has fallen by more than half since August, hitting 5.6 per cent as of Jan 10, due largely to falling commodities prices.

The bank predicted inflation would fall still further, to 3 per cent by March.

Consumer prices have fared less well, thanks to persistently high food costs, the bank said. Consumer price inflation is still in the double digits, the bank warned.

KVS Manian, head of retail liabilities at Kotak Mahindra Bank in Mumbai, said given the worrisome fiscal deficit - which he said totals 10 per cent of GDP, counting states' debts - India has little room to boost spending to stimulate growth. The reserve bank, he said, is thus trying to use monetary policy cautiously.

'They want to be cautious about releasing all their ammunition too quickly,' he said.

Mr Subbarao also said banks had relatively low exposure to beleaguered outsourcing giant Satyam Computer Services Ltd. and related companies. Satyam has been scrambling to pay employees and hold on to customers since its founder confessed to a US$1 billion fraud on Jan.7.

'There is no systemic threat to the banking system or individual banks,' he said.

The investigation into banks' role in the scandal is ongoing, he said. So far, he added, 'we have not seen any major irregularity.' -- AP